IMF approves Georgian economic policy
20 January, 2011
IMF approves Georgian economic policy

The International Finance Corporation of World Bank approved Georgian economic policy of 2010 and disbursed a new USD 153 million-worth loan to Georgia.
Georgian government eagerly announced by the end of 2010 that the economic growth exceeded the forecasted 2% by 4% by the end-year of 2010, and the budgetary deficit shrunk from 9.2% of 2009 to 6% in 2010.  Government swears that the economic growth will go ahead in 2011 and targets at much hopeful macro-economic figures.
Georgian economic

analysts do not share the optimism of government however. They think the economic growth is rather caused by inflation than bigger economic activity of the country.
“The inflation rate stands at 11% officially, while everybody knows that it is much higher in fact,” Davit Narmania, Director Executive of the Institute of Caucasus Economic and Social Research, told Georgian Journal. “Besides this 6% of economic growth is preliminary assessment, the real figure will be drawn out after the entire yearly data will be summarized.”
According to Levan Kalandadze, Director Executive of Association of Georgian Small and Medium Enterprises, the 6% growth of GDP happened thanks to inflation and increased state expenses implemented in infrastructure projects mainly not thanks to robust business activity that remains still sluggish.
“GDP includes both imported and locally produced products, it does not reflect the real local business productivity,” he said.
But the International Monetary Fund (IMF) approves the economic policy of Georgia. It completed the seventh and eighth reviews of Georgia’s economic performance under a Stand-By Arrangement (SBA) for an amount of about USD1 billion [extended until June 14, 2011] and disbursed a USD 153 million loan to the country.
The authorities indicated that they do not intend to draw the USD 153 million loan that became available to Georgia after the completion of the seventh and eight reviews.
According to Murilo Portugal, Deputy Managing Director and Acting Chair of IMF based on the steady implementation of the program’s economic policies, Georgia’s economic recovery has strengthened, as evidenced by better-than-expected growth and the stabilization of the exchange rate. The authorities’ economic policies, focused on tighter monetary and fiscal policies and exchange rate flexibility, will lay the groundwork for achieving macroeconomic stability and growth based on private sector financing and investment. While short-term risks to growth appear balanced, significant downside medium-term external risks remain, related in particular to the uncertainty surrounding the recovery in private capital inflows, including Foreign Direct Investments (FDI).
“The budget for 2011, which provides for a further reduction of the deficit of about 2 ½ percent of GDP, is consistent with the authorities’ objective of reestablishing fiscal sustainability. The authorities’ commitment to cap expenditure in 2011 is commendable, as is their decision to introduce an escape clause in the constitutional amendment subjecting tax increases to a referendum. This clause will provide the authorities with more flexibility in implementing the consolidation efforts necessary over the medium term,” Portugal said on January 12, 2011.
He belies that  the recent increase in the policy rate and the decision to tighten reserve requirements will help to bring down inflation in 2011 however authorities should stand ready to tighten monetary policy further to persist inflationary pressures. Moreover, to rebuild net international reserves exchange rate flexibility should remain an anchor of the authorities’ economic strategy.
The IMF approves Georgian banking sector’s high levels of capital that provides adequate buffers against adverse shocks, but finds critical to keep the close supervision of banks.
“As announced by the authorities, it is also important to continue tightening the regulatory framework as financial sector stability solidifies,” the IMF paper reads.

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